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Weekly Oil & Gas Market Highlights: June 23, 2011

Deloitte Center for Energy Solutions publication

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Key Oil & Gas price indicators for the prior seven days

Crude oil, USD per bbl Noon (EDT) on Thursday, 6/23/11 Noon (EDT) on Thursday, 6/16/11
Front-Month NYMEX Light, Sweet Crude Oil (“WTI”) Futures $90.89 (July-2011 Contract) $94.87 (July-2011 Contract)
WTI Cushing Spot $90.54 $94.70
Dated Brent Spot $107.56 $114.21
Natural gas, USD per MMBtu Noon (EDT) on Thursday, 6/23/11 Noon (EDT) on Thursday, 6/16/11
Front-Month NYMEX Henry Hub Futures $4.21 (July-2011 Contract) $4.67 (July-2011 Contract)
Henry Hub Spot $4.41 $4.83

Data sources: Bloomberg; CME Group

Oil & Gas Highlights

  • Oil markets remain extremely volatile on supply concerns and fears that EU’s sovereign debt crisis will spread from Greece to Ireland, Italy, Portugal and Spain. A larger than expected draw on U.S. crude supplies pushed prices up briefly Wednesday. Then, oil prices nose dived on Thursday as 28 International Energy Agency (IEA) member countries agreed to release 60 million barrels of oil from their emergency strategic stocks, the first time since 1991. The IEA’s decision aimed to remove the tightness in the oil market that they felt threatened to undermine “the fragile global economic recovery.” The move follows a failed Organization of the Petroleum Exporting Countries (OPEC) agreement to increase official production targets in Vienna earlier this month. Despite global economic unease, the Energy Information Administration (EIA) forecasts oil supply and demand fundamentals underlying the market to remain strong due to global economic expansion in China and other emerging markets.
    • About half of IEA’s release or 30 million barrels of oil will come from the U.S. Strategic Petroleum Reserve (SPR), which is currently at a record high level of 727 million barrels. The reserves have been tapped for emergency reasons only twice, after hurricane Katrina in 2005 and in 1991 after the first Gulf war. Proponents of the decision believe it will help curb high gas prices and facilitate the global economic recovery. Opponents of the plan note that the SPR should only be tapped when there are extreme supply shortages. When the reserve is replenished it will cost about twice as much to replace. In comparison, approximately 70 million barrels have been taking offline since the Gulf of Mexico drilling moratorium.
    • As the summer driving season begins, the average price of a gallon of regular gasoline fell 3.7 cents to $3.646. Gasoline prices are down for the sixth straight week; diesel prices decreased slightly.
  • The EIA forecasts that global oil demand will average 88.4 million barrels per day (bbl/d) in 2011, 1.7 million bbl/d higher than in 2010. Despite China's anti-inflation measures, which some analysts believe will reduce their growth outlook and subsequent oil consumption, the International Monetary Fund forecasts Chinese growth at 9.6%, increasing their demand to 700 thousand bbl/d. Chinese consumers’ reliance on diesel to fuel their backup generators during blackouts and brownouts can cause large increases in oil consumption. This doesn’t bode well for China this summer as the State Grid Corporation of China warned of the worst electricity shortages since 2004 “as coal prices have run ahead of electricity prices, causing electricity generators to run at a loss - and thus providing them with a disincentive to produce electricity.” In addition, severe drought conditions have curtailed China's hydroelectricity generation, compounding the impact of potential shortfalls in coal-fired power generation. Hydroelectric generation is a substantial secondary source of Chinese electric generation, accounting for more than 16% of power supply, according to the EIA.
    • On a positive note, steep increases in Chinese refining capacity this year will boost China's capacity to produce these needed middle distillates domestically. In recent years, China has moved very close to Japan as the world's largest importer of Middle East crude oil. At the same time, as China's refining capacity has grown both larger and more complex, its ability to extract middle distillates from those relatively low-quality grades has substantially increased.

Natural Gas Highlights

  • This week opened with natural gas futures down for a sixth session as mild weather forecasts continued to weigh on the demand outlook for power-plant fuel. Since reaching an 11-month high above $4.90 per million Btu (MMBtu) earlier this month, market participants have turned bearish as production continues to climb, weather forecasts are mild, and nuclear plants return to use after spring maintenance. Prices dropped slightly at most market locations, with some exceptions, mainly in the Northeast. Natural gas demand rose slightly from the previous week, and remained flat year-over-year. Declines in residential and commercial consumption were offset by a 5.3% increase in consumption for natural gas for electric power generation and a 2.5% increase in industrial consumption, according to BENTEK data. Supply this week increased slightly, as increases in production were offset by declines in pipeline imports from Canada, according to the EIA.
    • Production increased 0.6%, which is 7.2% greater than a year ago. Production from West Virginia has grown over 350 million cubic feet (MMcf) per day year-to-date, according to BENTEK, and exceeded 1 billion cubic feet (Bcf) per day in early June.
    • Natural gas prices fell slightly at most market locations from Wednesday, June 15 to Wednesday, June 22. The Henry Hub price fell 10 cents from $4.52 MMBtu last Wednesday to $4.42 per MMBtu yesterday. At the New York Mercantile Exchange (NYMEX), the price of the July 2011 near-month futures contract fell by 26 cents, or about 6%, from $4.58 last Wednesday to $4.32 yesterday.
    • Working gas in storage was 2,354 Bcf as of Friday, June 17, 2011, according to EIA estimates. This represents a net increase of 98 Bcf from the previous week. Stocks were 258 Bcf less than last year at this time and 64 Bcf below the 5-year average of 2,418 Bcf. The natural gas rotary rig count, as reported by Baker Hughes Incorporated, fell to 870 as of Friday, June 17.
  • Global events could considerably tighten the global natural gas market, driving up prices and creating increased competition between Europe and Asia, according to the EIA. Events contributing to the shortage include instability in Middle East and North Africa, Japan's Fukushima disaster and the global nuclear backlash that has increased demand for natural gas. Increased demand has reduced the availability of LNG to Europe in 2011 right when Germany has committed to retiring its nuclear fleet. Increased cooling demand in the Middle East is also expected to rise to record levels this summer, according to EIA forecasts. While natural gas is likely to play a greater role in the world energy mix given its growing resource base and it’s relatively low carbon emissions compared to other fossil fuels, increased competition will be accompanied by higher prices, according to a report released by the Congressional Research Service (CRS).
    • The amount of natural gas traded has been increasing over the last five years. Liquefaction capacity has increased 30% since 2008, and trade in LNG has grown almost 30% since 2005. International pipeline trade is up almost 20% since 2005. About 70% of the natural gas produced is consumed in the same country. This leaves 30% of all gas production moving via international trade, according to CRS.
    • Europe is the largest importing region of natural gas, receiving most of its imports by pipeline from Russia, Norway, and Algeria. Asia, the most import-dependent region, relies mostly on LNG, although China is actively pursuing pipeline projects with certain neighbors and opened its first import pipeline from Turkmenistan via Uzbekistan and Kazakhstan at the end of last year.
    • Outside of Canada, whose shale gas industry is developing alongside that of the United States, it is unlikely that commercial production will be achieved before the end of the decade. Most countries looking at shale gas do not have the data, technology, or equipment required to evaluate their shale gas resources, let alone successfully exploit it, at this point, according to CRS.

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